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SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission File No. 33-64164-A
COCONUT CODE INC.
(Exact name of registrant as specified in its charter)
FLORIDA
(State or jurisdiction of incorporation or organization)
59-2556411
(I.R.S. employer identification No.)
1430 South Federal Highway, Deerfield Beach, Florida 33441
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (954) 481-9331
NOT APPLICABLE
Former name, address and fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___
The number of shares of common stock, $.01 par value, of the Registrant issued
and outstanding as of July 10, 1998 was 3,604,509.
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<PAGE>
COCONUT CODE, INC.
INDEX TO FORM 10-QSB
Page
Number
------
PART 1 FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Balance Sheet as of June 30, 1998 3
Statements of Operations - For the
Three and Six Months Ended
June 30, 1998 and 1997 4
Statements of Cash Flows - For the
Six Months Ended June 30, 1998
and 1997 5
Notes to Consolidated Condensed Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
PART 2 OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security
Holders 10
Exhibits and Reports on Form 8-K 10
<PAGE>
PART 1. FINANCIAL INFORMATION Page 3
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
June 30, 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 135,388
Accounts receivable (net of allowance for doubtful accounts
of $34,547) 26,867
Inventories 22,856
-----------
Total current assets 185,111
PROPERTY AND EQUIPMENT, (net of accumulated
depreciation of $421,098) 436,530
OTHER ASSETS:
Loans to officers 21,406
Capitalized software development costs (net of accumulated
amortization of $19,037) 70,010
-----------
$ 713,057
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 134,587
Accrued expenses 197,203
Customer deposits 16,275
Deferred revenue 159,484
Current portion of notes payable 38,202
Current portion of lease payable 26,753
-----------
Total current liabilities 572,504
-----------
LONG-TERM PORTION OF NOTES AND LEASE PAYABLE 69,574
-----------
STOCKHOLDERS' EQUITY:
Common stock ($.01 par; 10,000,000 shares
authorized, 3,604,509 issued and outstanding) 36,045
Additional paid-in capital 2,871,465
Accumulated deficit (2,836,531)
-----------
70,979
-----------
$ 713,057
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See notes to consolidated financial statements.
<PAGE>
PART 1. FINANCIAL INFORMATION Page 4
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the
three months ended June 30 six months ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 419,607 $ 1,023,089 $ 958,555 $ 2,284,761
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 87,558 157,988 206,777 284,142
Selling and marketing 142,196 154,100 296,934 285,407
General and administrative 206,698 278,614 440,301 541,422
Research and development 239,783 234,260 504,406 429,050
Depreciation and amortization 27,000 18,875 54,000 36,375
----------- ----------- ----------- -----------
703,235 843,837 1,502,418 1,576,396
----------- ----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS (283,628) 179,252 (543,863) 708,365
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 22 3,526 734 3,561
Interest expense (5,258) (7,887) (10,501) (13,738)
Other 892 4,156 3,631 8,450
----------- ----------- ----------- -----------
(4,344) (205) (6,136) (1,727)
----------- ----------- ----------- -----------
NET (LOSS) INCOME ($ 287,972) $ 179,047 ($ 549,999) $ 706,638
----------- ----------- ----------- -----------
NET (LOSS) INCOME PER COMMON
SHARE:
Basic and diluted ($ 0.08) $ 0.05 ($ 0.15) $ 0.20
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic and diluted 3,604,509 3,591,027 3,607,443 3,561,838
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PART 1. FINANCIAL INFORMATION Page 5
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the
six months ended June 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($549,999) $ 706,638
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 54,000 36,375
Provision for doubtful accounts -- 75,000
Compensation expense for stock issuances 6,677 63,588
Changes in operating assets and liabilities:
Accounts receivable 462,471 (43,893)
Finance receivables, net 10,968 9,459
Inventories 8,952 (4,549)
Prepaid expenses 7,392 10,901
Capitalized software development costs (7,347) (23,644)
Accounts payable (17,597) (84,797)
Accrued expenses (8,398) (24,488)
Customer deposits (5,500) 98,536
Deferred revenue 27,087 6,896
--------- ---------
Total adjustments 538,705 119,384
--------- ---------
Net cash (used in) provided by operating
activities (11,294) 826,022
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (17,749) (202,117)
Notes receivable 7,470 --
Loans to officers (21,406) --
--------- ---------
Net cash (used in) investing activities (31,685) (202,117)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans from officers (19,055) (18,445)
Proceeds from note and leases payable -- 122,161
Payments on notes and leases payable (33,522) (131,699)
--------- ---------
Net cash (used in) financing activities (52,577) (27,983)
--------- ---------
Net (decrease) increase in cash and equivalents (95,556) 595,922
CASH AND CASH EQUIVALENTS, beginning of period 230,944 95,883
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 135,388 $ 691,805
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 10,501 $ 13,738
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COCONUT CODE, INC. Page 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Coconut Code, Inc. (the "Company") was organized as a Florida corporation
on April 30, 1984. The Company's principal business is to develop, market and
support accounting and management information software primarily for the
restaurant and hospitality industry.
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements, the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Certain information and footnote disclosures required by
generally accepted accounting principles for complete financial statements have
been condensed or omitted.
In the opinion of management, the accompanying financial statements include
all adjustments (consisting of only normal, recurring adjustments) considered
necessary for a fair presentation of financial condition, results of operations
and cash flows of the Company. The results of operations for the six month
period ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the full year. For further information, these financial
statements should be read in conjunction with the Company's 1997 Annual Report
filed as part of the Company's 10-KSB for the year ended December 31, 1997.
2. NET (LOSS) INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" which simplifies the accounting for earnings per share
by requiring presentation of basic earnings per share including only outstanding
common stock and diluted earnings per share including the effect of dilutive
common stock equivalents.
The Company's basic and diluted net (loss) income per share are the same
since the Company's stock options and warrants are anti-dilutive.
<PAGE>
COCONUT CODE, INC. Page 7
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTORY STATEMENT
The Private Securities Litigation Reform Act provides a "safe harbor" for
forward-looking statements. Certain statements included in this Form 10-QSB are
forward-looking and are based on the Company's current expectations and are
subject to a number of risks and uncertainties that could cause actual results
to differ significantly from results expressed or implied in any forward-looking
statements made by, or on behalf of, the Company. The Company assumes no
obligation to update any forward-looking statements contained herein or that may
be made from time to time by, or on behalf of, the Company.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Net sales for the six months ended June 30, 1998 were down significantly
from the corresponding period in 1997. At $959,000, sales declined $1,326,000
from the record 1997 level of $2,285,000. Two principle factors caused the drop:
(1) delayed market introduction of the Company's new, Windows based software,
and (2) the significant effort and human resource allocation the Company made to
its major custom software customer. As of June 30, 1998, the Company's order
backlog approximated $300,000.
For the 1998 period, operating costs and expenses decreased $74,000 when
compared to the prior year period. The principal reason for the decrease was
lower cost of sales due to the decrease in sales and a lower provision for
uncollectible receivables, offset in part by higher spending on research and
development.
Because of the drop in sales and with operating expenses at a level to
support a much higher volume of sales, the Company incurred a net loss of
$550,000 for the first six months of 1998 versus a net profit of $707,000 for
the corresponding 1997 period.
Three Months Ended June 30, 1998 Compared to the Three Months Ended June 30,
1997
Net sales for the second quarter of 1998 were $420,000 compared to $959,000
for the 1997 period. The principal reason for the decrease in sales was the
delay experienced by the Company in introducing its new, Windows based software
and the significant effort devoted to its major custom software customer.
<PAGE>
COCONUT CODE, INC. Page 8
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (cont'd.)
For the quarter, operating costs and expenses decreased $141,000 versus the
comparable 1997 quarter. The primary reasons for the decrease were lower cost of
sales resulting from the decline in sales and a lower provision required for
uncollectible receivables.
For the 1998 quarter, the Company incurred a net loss of $288,000 compared
to net income of $179,000 for the 1997 quarter.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had a working capital deficit of $388,000
compared to working capital of $178,000 at December 31, 1997. The decrease in
working capital in the quarter primarily results from the net loss caused by the
decline in sales.
As of June 30, 1998, the Company had $29,000 outstanding under its $100,000
three year term loan facility with a bank. This loan matures in March 1999.
During 1997, the Company entered into three capital lease obligations
aggregating $104,034 for the purchase of computer equipment for use by the
Company. Two leases are for a term of 48 months, while the third lease is for 36
months. At June 30, 1998, the total amount outstanding under these leases was
$76,000.
In March 1997, the Company borrowed $44,000 from a bank for the purchase of
three automobiles for use by the Company's product support staff in servicing
the Company's major, national account. As of June 30, 1998, $30,000 was
outstanding on the loan which matures in April 2001.
Other than the borrowings described above, the Company's primary source of
funds has been from the sale of its products and services.
In the near term, because of insufficient sales, the Company is going to
experience a decline in its cash position and, consequently, will find it
increasingly more difficult to continue operations at current spending levels.
The Company's ability to generate new sales and improve cash flow could be
hampered to the extent, if any, the Company is required to reduce operating
costs and expenses. In addition, successful acceptance in the marketplace of the
Company's new, Windows based software is critical to achieving sufficient cash
flow to support the Company's current operations.
<PAGE>
COCONUT CODE, INC. Page 9
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (cont'd.)
Year 2000 Compliance
The Company does not believe that it has material exposure to its
information systems year 2000 compliance. The Company is currently developing
software for its customers who purchased the Company's DOS based products which
will enable such products to comply with year 2000 requirements. The Company's
Windows based products already contain features to comply with year 2000
requirements. The Company does not believe that it will encounter significant
difficulties with respect to year 2000 compliance issues that its major vendors
may experience because products that the Company obtains from its major vendors
are generally not year 2000 date sensitive. The Company does not expect that its
vendors' year 2000 difficulties, to the extent that they exist, will have a
significant effect on the Company.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS No. 130 is effective as
of March 31, 1998 and SFAS No. 131 as of December 31, 1998. The Company adopted
SFAS No. 130 as of January 1, 1998 and such adoption did not have an impact on
the disclosures herein as comprehensive loss is equal to net loss for the three
months ended March 31, 1998. SFAS No. 131 will not have an impact on the
Company's annual or interim financial statements or disclosures since the
Company currently operates in only one business segment.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits". This statement is effective
for fiscal years beginning after December 15, 1997. Since the Company does not
currently sponsor a defined benefit pension plan or defined benefit
postretirement plan, the disclosures required by SFAS No. 132 will presently not
be required to be made by the Company.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-2, Software Revenue Recognition. SOP 97-2 supercedes SOP 91-1. SOP
97-2 requires companies to defer revenue and profit recognition unless four
required criteria of a sale are met. In addition, SOP 97-2 requires that revenue
recognized from
<PAGE>
COCONUT CODE, INC. Page 10
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (cont'd.)
Recently Issued Accounting Pronouncements
software arrangements be allocated to each element of the arrangement based on
the relative fair values of the elements, such as software products, upgrades,
enhancements, post-contract customer support, installation or training. SOP 97-2
is effective for all transactions entered into in fiscal years beginning after
December 15, 1997 and has been adopted by the Company effective January 1, 1998.
The adoption of SOP 97-2 did not have a material impact on the Company's
financial position, results of operations or cash flows for the six months ended
June 30, 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP is effective for
fiscal years beginning after December 15, 1998. The SOP requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful of the software. The SOP
also requires that certain costs, as defined, related to an internal-use
computer software development project be expensed as incurred, while certain
other costs incurred at the latter stage of the project be capitalized and
amortized over the estimated useful life of the software. It is expected that
SOP 98-1 will not have a material impact on the Company.
PART 2. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the second
quarter of 1998.
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
COCONUT CODE, INC. Page 11
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned there
unto duly authorized.
COCONUT CODE, INC.
(Registrant)
Date: August 14, 1998 BY: /s/ Daniel W. Reese III
-----------------------
Daniel W. Reese III
Vice President and Chief Financial officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 135,388
<SECURITIES> 0
<RECEIVABLES> 82,820
<ALLOWANCES> 34,547
<INVENTORY> 22,856
<CURRENT-ASSETS> 185,111
<PP&E> 857,628
<DEPRECIATION> 421,098
<TOTAL-ASSETS> 713,057
<CURRENT-LIABILITIES> 572,504
<BONDS> 0
0
0
<COMMON> 36,045
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 713,607
<SALES> 419,607
<TOTAL-REVENUES> 419,607
<CGS> 87,558
<TOTAL-COSTS> 703,235
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,258
<INCOME-PRETAX> (287,972)
<INCOME-TAX> 0
<INCOME-CONTINUING> (287,972)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (287,972)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
